The Changing Role of Buying Groups and Distributors

Buying groups and distributors are the essential fuels that, in combination, keep a very complex engine—the consumer technology business—running smoothly. And in the last few years, they have morphed into much more than mere sources for timely product acquisition in a pinch (distributors), or conduits to better pricing than if a retailer were to go it alone in the search for product deals (buying groups),

Not only have they had to become the best at those basic functions. The ante has been upped considerably in what dealers need to stay afloat, with the rise of mega-etailers like Amazon, who offer consumers the irresistibility of hard-to-beat low pricing and the lure of speedy product dispatch.

We canvassed some well-seasoned dealers and integrators who have been around long enough to witness the changes within both distribution and buying group operations, and who were willing to speak in general about how these entities’ roles have grown over the past few years to better serve them as they strategize against “the Amazon effect.” Here are their thoughts.

Technology Integrator (TI): What is it that’s most helpful to your business about your relationship with your buying group, besides getting good pricing on your products?

Bob Cole, owner and president, World Wide Stereo, Hatfield, PA: Cole: As a general rule, outside of the pricing issues and programs, there’s the interaction between members. And for some buying groups, the camaraderie is very well known, where the group is kind of homogeneous. They share their joy and they share their suffering, and they really focus on sharing education. There are other variations on that theme, but with a similar formula.

Everyone wants to belong to a winning team, and that’s important, and everybody wants to be chosen. Some buying groups, you just sign up for; others, you have to be vetted. And the psychological aspect is that it’s nice not to be alone. It’s not a small thing, group dynamics.

You’re not alone…I can sit in meetings with guys who are certainly my competition. Yet, we all recognize the value of protecting our channel and sort of taking care of one another. We all want to see each other succeed—and that’s very valuable. It contributes to the group dollar as well as the group momentum, and manufacturers respond accordingly. [Anyone who] has a good year is adding to our volume and adding to our reputation. And that’s a very positive thing.

Franklin Karp, COO, Audio Video Systems, Plainview, NY: For me, the interaction and the education I get from the buying group is equal in value to the better deals I get.

It’s only gotten better and more educational and collegial in the last short period of time.

David Wexler, Co-Owner, The Little Guys, Mokena, IL: When it started out it was about pricing. Your initial motivation was you knew that other guys are paying less money than you are! What the buying group has become for us is information-sharing. It’s sharing experiences with other people who have gone through the same stuff.

There are some guys who have already done what you’re trying to do; you can see the national trends better.You’re dealing with a room full of people who are incredibly smart about business. And it’s not just generic—it’s about the same, specific business you’re in. So that makes a huge difference.

Even though there’s a variety of different-sized dealers in a group, you still have that ability to relate to the people you’re sitting with [at the meetings] and share information. I think the other big thing it does—not necessarily for us, because we already had this - is that it gives you a very good relationship with vendors. It starts you out on the right foot with principals of companies—people who are a little higher up on the chain than the guy coming out, putting literature in the racks. And that’s important.

TI: How about for distributors: what’s most helpful to your business about distributors besides getting timely delivery and good pricing on products?

Ari Klein, Vice President, Purchasing, Datvision, New York, NY: The fact that we have somebody who can go to the manufacturer and speak on behalf of us if any issues arise, or get special pricing, or do a deal. They’re very good at being middlemen. And it’s gotten better over the years. I’d agree that they’re providing more education and product information, and helping to figure out what the trends are going to be.

Wexler:The thing with distributors is it’s the convenience. You need something on Tuesday, and it’s there on Wednesday. It’s the ability to form a relationship with that distributor and have them take care of you where you need it.

When distributors first started out, their prices were too high. So you always bought direct with everything you bought. But in today’s world, it’s different—they allow you to still make the margin you need to make, to survive.

The big vendors are happy not to have to deal with hundreds and hundreds of accounts, and credit, and money—they’re not having to deal with us on a money basis. They’re only dealing with us on a relationship basis.

Distributors, frankly, now have all the risk, from a dollars-and-cents perspective. They have the financial risk. That’s what it’s become. I think it’s worked out for everybody. Everybody has the same shot at getting product now. It used to be just the big guys got product first, and the little guys had to wait. Now it’s more even.

The other thing is, because of the distribution concept, you can see more of a variety of product hands on—you can go into the distributor’s office and spend some time with that product, not at your expense.

Karp: In this day and age, only the biggest of the big, especially with video, buy direct. You have to have a good distributor relationship to buy video—whether it’s Sony, or Samsung, or LG, it doesn’t matter. For a guy my size, I’m a big fish in the custom installation pool, but in the overall scheme of CE, I’m not even a minnow. So you have to have a good distributor and a good distributor relationship.

There are some who really do make that extra [educational] effort, and we don’t always take advantage of what they’re offering. But, [some are] very forward-thinking. I have a bunch of local distributors. The truth is, you might pay a couple of bucks more, but if you need it now, and you can pick it up on the way to a job site… you can’t stop at a manufacturer and pick it up. So they serve a very, very important function.

Cole: Timely delivery is important. In my particular scenario, I don’t deal with distributors for the most part; it’s the exception rather than the rule… But also, it’s still true that they were very helpful in my formative years. And the staff helped train and educate me about certain product. Their broad-spectrum factory representatives have an investment in making sure you’re educated about the products they sell—and that’s very valuable.

Some distributors are very supportive of their dealers, over and above the product. And it is almost like a buying group… They provide a wide breadth of product, and on a distributor level, you can have one or two distributors fill all your needs.

We only use distributors for certain products, and for starting with a new product or category, sometimes I’ll buy it from a distributor for a while to see how I feel about a product before going direct. We’re looking at small appliances, and I’ll buy that initially through a distributor to see if it has any velocity. Because to go direct, even though there’s much more margin, you have to make a big commitment.

TI: What are some of the most helpful things your buying group provides you for your business, besides good deals?

Wexler: They’re doing it for us now... Access to the advertising, promotional capabilities a studio—giving us access to the commercials—the ability to take advantage of that kind of stuff. That’s huge. We can make a commercial spot for less than $200. That spot would cost us between $3,000 and $5,000 all day long, any other time, and here it is—we’ve got our spot for $200.

Now, the buying group is doing everything we need them to do. There’s not much else.

The thing about [the group] is the brutal honesty. It’s not about who sells the biggest system, or who does this or that. It’s about ‘You know, I tried that and it didn’t work.’ It’s sharing that with somebody. That’s amazing. The fact that you’re willing to share and to save [someone else] from having that same experience. Why should I have to fail at something that somebody else already tried? Why can’t I learn from that?

They are all open. I’ve never heard anybody hold back. It is a therapy session. There’s lots of other people out there going through the same good times and some of the hard stuff—and why not share it with everybody? It’s our group and we make the direction.

Karp: Some are making strong efforts on the education level for my staff. [Our] group has made it a launch point to spend money and help their members educate their installers and their salespeople to the point where they’re paying for third-party education. As far as I know, that’s unprecedented.

TI: What about distributors – what are the most helpful things they do to aid in their clients’ businesses, in your view?

Karp: The main thing a distributor does is access and just in time, and any of the other fringe benefits—vendor education, or maintaining their own training—that’s a bonus. A well-organized, well-structured distributor that can get out of the way and get the job done in a quick fashion—that’s a tremendous asset.

Wexler:They’re great with on-time delivery. Their training is getting better, but it could go one step further, to be able to send our salespeople to their offices. I’m starting to see this a little more—if they had a guy that went into the field a little bit more, where they weren’t just in their offices, pushing buttons. In the field, going over certain products, where they went over the concepts—that would be helpful, too.

TI: What sort of retailer or custom integrator would not be receptive to belonging to a buying group, at this stage in the industry?

Cole: A foolish one! I know guys who say they don’t want to belong to a group. On some levels, they don’t have the volume to make it worthwhile. Some just feel they know everything they need to know. Overall, it’s a beneficial thing to do.

Karp: There are probably still guys out there who think that they can get better deals and do it on their own—and they’re all mistaken. Having been a big fish at one time on the retail side [as head of Harvey Electronics in New York City], it still had a benefit, being a buying group member. I don’t see a downside for anyone unless you’re so small and you’re operating out of your basement and you can’t afford the dues; anyone would get a benefit out of joining a buying group.

If you can’t afford the dues, what are you doing in business?

Wexler: Here’s who doesn’t belong to a buying group—guys who think they’re smarter than everybody else and think they’re better negotiators than everybody else! That included us in the beginning. I didn’t think I needed a buying group. I used to think, ‘I could negotiate with the manufacturers; I’m great at it.’ Well, guess what? You negotiate from a single-store perspective, from a small-percentage perspective; the buying group negotiates from a huge perspective. And no matter how good you are at it, you don’t have the leverage that the buying group has. There are guys who think they’re really smarter than everyone else, so ‘I don’t need that.’ There are guys who are monster-sized enough that they can negotiate monster deals. But there are still things that they don’t do so great that they could learn from the group. So it’s not just about negotiating; it’s about the energy and the information, and the knowledge.

And it’s nice to have someone to call when you’re down a little bit, and have another dealer talk you back up. It’s therapy—100 percent. I wouldn’t deny that.

TI: Are there any dealers or integrators who might opt out of using a distributor – and why might that be?

Klein: We mainly used to use them for hardware and accessories in earlier days. But these days, all of the distributors are pretty much carrying all of the categories. They’ve branched out, and we’ve taken on other categories they’re in. Housewares, drones, smartwatches, skateboards, computers, even toys—everything under the sun.

Distributors these days are no longer focused on just a few things—they’re in every category. They’re growing and much broader than they used to be. And educationally, they have seminars, and they sometimes tell you things you should look at that you may not have looked at otherwise.

Karp: Probably Best Buy! Anyone else, in this day and age… manufacturers have intentionally shed themselves of the credit issues and billing issues. They’ve pushed as much of that off their books and on to the distributors’ books as possible. Only the smaller audio manufacturers are still on a direct basis with probably most of their accounts, but if you drop below a certain level, you’re not economically feasible any more for them to retain you as an account, so distributors have to pick up the ball.

The big manufacturers? They don’t do business with anybody small directly any more. [To be a direct account with them you have to be in the millions of dollars.] There’s no custom integration guy doing that kind of business. So they [manufacturers] have streamlined their operations by having less active accounts, so they are able to internally make their changes—they don’t need as large a credit department, they probably don’t need as many salespeople… Because they’ve pushed [all that] down to the distributors and the distributors have to maintain all of that.

TI: Where do buying groups need to aim their focus for the future, and to help dealers counter “the Amazon effect?”

Karp: The Amazon Effect is what it is—it’s inevitable. And where buying groups can really help their members is on the education side - and in helping their dealers to streamline their businesses, and become better businessmen.

So it’s not just education for installers and salespeople; but it’s also education for the owners and managers of those businesses to become more efficient. Because that’s the name of the game. You’ve got to learn how to squeeze every penny.

Wexler: It’s staying ahead of the curve, technology-wise, making sure they provide the information to their members about what’s coming down the road two years out, four years out. Finding out about what products the vendors are making that you don’t see at the show because they are in the back room. So—keeping their members informed and ahead of the curve technology-wise is Number One.

Also, the changing marketplace, and things that are coming—what’s Amazon going to do next? Virtual retail stores? Do we need to focus on that kind of stuff? Where is that coming from? Where are those going and what are they doing? The more information they give us about them, the better.

Cole: That’s a big focus for every group. Every single group wants to beat Amazon, or figure out how they can live with Amazon, even though I know they want to swallow me... If I have a product that has really good velocity, they’re going to go to that manufacturer and want it direct…That’s what they do. I don’t get angry.

I try to be smarter than Amazon. They’re not as smart as me in terms of the level of detail about the products, so I buy around them. Also in lines that we share, they make mistakes, frequently. They under-buy, they under-forecast, so I’m right there as soon as they slip… Amazon is magnificent—but they don’t do a selling job. [Consumers have] to know what they want. So they’re not pushing any technology. If you want someone who’s going to drive your technology and push your premium products, that’s our advantage…

TI: Same question about distributors and how they can help counter “the Amazon effect.”

Klein: Distributors are coming down in price and definitely helping us make more money in the long run. The Amazon effect, believe me, is affecting everybody. So distributors need to continue to focus on their retailers – the guys who are still brick and mortar, because those are the guys who supported all these manufacturers for years.

Karp: They have to maintain their own fiscal house, because they have to remain viable. You know, a distributor can’t be ‘out of stock.’ If he’s having a tough time financially, if he’s not maintaining his Accounts Receivable, then he’s got an issue, and it’s going to reflect in his ability to have the product when I need it. So those guys have to be good fiscal stewards for their own businesses.

Wexler: I think distributors are headed in the right direction. They are improving their training capabilities. They just need to keep doing what they’re doing and maintain the positive attitude towards us. I think they’re totally dependent on the independents, at this point, and they just need to not lose focus with who we are.